economic model

The standard competitive economic model predicts that there will only be one price observed for a good or service. If one firm tried to charge a higher price than the other, consumers would just avoid the high priced firm. We know from casual observation of the world around us, however, that even the most standardized or identical of products carry different prices depending on where and when we shop. These real world price differences are due in many cases to the existence of “transactions costs,” the most important are the buyer’s costs of acquiring information (about product quality or prices) and the buyer’s cost of transportation. As a result of these “transactions costs,” more than one price for the same product can exist simultaneously; indeed, there is evidence that in most metropolitan areas or cities there is a distribution of prices for similar or even identical products.

Your task in this take – home project is to investigate the degree of price variation for a given product or service in the Lansing – East Lansing metropolitan area by following these steps:

1. Choose a product or service. This may be either a particular brand or model of something (e.g. 24 exposure Kodak 100 film) or relatively equivalent models of different brands (e.g. a four pack of 60 watt light bulbs or a gallon of milk). Please indicate by July 5what product or service you have selected.

2. Formulate a hypothesis about and explanation for the amount of price variation you expect to find for the selected product or service.

3. Collect prices for the product or service from at least 10 different sources (sellers). In collecting these prices, you might want to select from different types of sellers (chain stores vs. mom-and-pop) and from sellers in different locations (e.g. downtown East Lansing vs. a mall). The nature of your product will influence you choices. Also be sure to note whether you collect a “regular” or a “sale” price.

4. Analyze your data and report your results and conclusions in a brief (no more than five pages) paper that you will present orally to the class on July 18. In your paper, discuss your hypothesis, how the data were collected, your findings, and give some economic explanations that seem consistent with the data.